Brazil’s president, Dilma Rousseff, signed a law that creates incentives for technological innovation, establishes programs to support broadband network installation and restores digital inclusion projects in the country’s public schools. Rousseff did veto Article 34, which would have created tax credits for the telecom development Fistel fund in exchange for private investments in strategic projects. However, even without this provision, the new law gives Brazil’s telecom industry many reasons to celebrate.
The law 12715 (which resulted from the interim measure 563), creates a series of tax incentives, especially for the telecommunications industry, such as tax relief for the deployment of new networks. The new law extends the exemption to various payroll sectors, such as software and semiconductors. It also includes benefits for the auto market. (Read full law document here—in Portuguese)
Other tax incentives were also approved. For Brazil’s ICT sector, the law creates a special tax regime of the National Broadband Plan, which aims to help expand and modernize telecommunication connections to broadband Internet. It suspends several tax collections such as IPI, PIS/Pasep, Cofins on computers and software for educational use, as well as tax exemptions for smartphones, machine-to-machine (M2M) equipment and routers.
The telecom union SindiTelebrasil evaluated the effect of the Law 12715/2012 as a means to reduce costs in Brazil, since it establishes incentives for telephony equipment and networks, as well as broadband. The telecommunications industry believes that this is an important victory for society as a whole and will enable the advancement of new markets in the country, encouraging investment.
“We see it as positive because it will speed up smartphone adoption in the country,” said Joao Paulo Bruder, telecom analyst at IDC. He said that as a result of the legislation, vendors that manufacture in Brazil will see an increase in device sale revenue, and carriers’ income will also rise since they will sell more data packages. In addition, he also noted that the BYOD (bring-your-own device) trend might grow as more employees purchase smartphones. Also, in the long-term, the law could contribute to increased revenues for wireless equipment vendors.
“We expect the total number of mobile devices sold to stay at the same level that we forecasted but with smartphones replacing feature phones,” Bruder said.
Machine to machine
The Fistel tax decreases for M2M equipment because of the law reduces the installation inspection rate (TFI) from R$26.83 to R$5.68. In addition, the legislation drops the inspection operation tax from 50% of TFI to 33%.
SindiTelebrasil has also pointed out the importance of the M2M market for supporting many solutions and generating new business, economies of scale, productivity and more services for consumers. “This virtuous circle has a positive effect on the country’s economy and Brazil’s GDP per capita,” SindiTelebrasil said in a statement.
These measures for the M2M sector were expected. Last June, during the Connected Live Latam Summit, Diana Tomimura, project manager at the Brazilian Ministry of Communications (Minicom), said that the Brazilian government was working to reduce taxes. The amount of government taxes has been one of the biggest barriers to widespread machine-to-machine (M2M) adoption in Brazil because until now, telecom operators had to pay the same taxes for mobile lines and M2M applications.
The new law also includes incentives for the use of the 450 MHz band, which is focused on deploying broadband in rural areas. SindiTelebrasil said that the reduction in Fistel and other federal taxes for equipment and services that use the 450 MHz band, such as telephony and rural broadband, including satellites, will increase broadband services, especially in the interior of the country.
The law is part of the Brasil Maior plan, announced by the government earlier this year, which seeks to stimulate the national economy through tax incentives and payroll tax exemptions. It aims to avoid the impact of international crisis and respond to the weak GDP.
In a recent Reader Forum column, Antonio Gil, the president of Brasscom (Brazilian Association of Information Technology and Communication Companies) noted that “It is perfectly possible that Brazil will leap from the fifth to the third-largest ICT market in the next decade, as the industry has scale, business knowledge, technical expertise, and capacity for innovation.”
Gil also highlighted that the country still needs to overcome some challenges in critical areas, such as labor costs, infrastructure and education.
Brasscom said that the new measure concludes the great transformation that began on August 2, 2011, with the enactment of Provisional Measure No. 540, published Law No. 12546, as amended by MP 563 on April 3, 2012, which reduced pension contributions to 2% of gross revenues for software companies and IT service providers. “This is a historic change that will benefit the entire economy with the stimulus to productivity and competitiveness,” said Edmundo Oliveira, director of institutional relations at Brasscom.
As consquences of the measure, Brasscom listed the discharging and redistribution of enterprises’ tax burden, reduction in direct costs; increased revenue, particularly for the income tax of enterprises and employees; greater transparency and ethics in business which may go public and attract investors; and reduction of exponential conflicts in labor courts and labor elimination legacy.
In 2011, the Brazilian IT industry had revenues of U.S.$112 billion and accounted for 4.5% of national GDP. “The payroll tax relief will lead the IT industry to meet the challenge of innovation and international competitiveness. We will improve services domestically and export more high-value services based on intelligence,” Oliveira said.